The government has announced in the 2025 Budget that the UK income tax thresholds will be frozen until April 2031 (a further 3 years from the original plan). This apparently technical change in how income tax is collected has wide-ranging consequences for household finances and long-term wealth building.
By 2031, tax thresholds will have been frozen for nearly a decade. The freeze was first announced by Conservative former Chancellor Rishi Sunak back in 2021.
What Does “Freezing Thresholds” Actually Mean?
Instead of annually increasing income tax thresholds to reflect inflation, the government has announced that these key thresholds will remain static in cash terms until 2031. Thresholds affected include:
- Personal Allowance: £12,570
- Higher Rate threshold: £50,270
- Additional Rate threshold: £125,140
This means that as the cost of living rises, people will be caught paying tax for the first time or more people will pay at higher rates, without any increase in real living standards. The effect of freezing thresholds is “fiscal drag” (effectively a stealth tax rise):
- People are pushed into income tax and higher bands
- Tax take increases without an explicit tax rate change
Why This Matters for Savings
The direct impact of the threshold freeze is lower after-tax income. This feeds into less ability to save, invest, and build financial security in the future.
- Lower real take-home pay.
- As wages increase only to keep pace with inflation, a higher proportion is taxed. In real terms, many households will feel poorer even if their nominal wage increases.
- Reduced monthly saving capacity.
- Savings won’t dive overnight, but slowly shrink over time. A small extra tax charge each month is less available for ISAs, pensions, and general investing.
- Slower house deposit accumulation.
- A threshold freeze reduces your ability to save for a house, especially over multiple years. Plan to take longer!
- A smaller emergency fund can be built.
- The lower real take-home pay makes it harder to build a spare cash buffer. Even those who don’t need one now are saving more slowly.
- Lower ISA contributions achieved.
- It’s more difficult to reach monthly or annual savings limits for tax-free cash in an ISA.
- Lower pension funding.
- Pension contributions are often a priority for those over 40, but the value of pension wrappers only helps if there is cash left to fund them.
- Greater need for tax-efficient planning.
- When fiscal drag bites, wrappers like pensions and ISAs become more critical but only if you have the money left to invest.
- Irony of less tax-free cash.
- By definition, a tax allowance is money not taxed. The freeze reduces the very surplus income on which tax wrappers act.
In all of these cases, a freezing threshold takes a small bite out of disposable income, which in the long run affects your capacity to build wealth.
How Different Income and Tax Brackets Are Affected
The effect of frozen thresholds is regressive:
- Lower earners.
- People earning just above the personal allowance threshold are more likely to be pulled into tax for the first time as wages increase slightly. This group also has the least financial buffer and is most sensitive to rising living costs.
- Middle-income earners.
- This group tends to be hit hardest. Those earning between £30,000 and £70,000 are highly exposed to fiscal drag. Many will take on additional work or receive inflation-linked pay rises, only to find much of it lost to tax.
- Upper middle and higher. Especially those near or just over the higher-rate threshold (£50,270) are increasingly affected as salaries rise.
- Those near or just above the higher-rate threshold will increasingly find more of their income taxed at 40%. Over time, this also affects bonuses and pension contributions.
- While higher earners still have more financial resilience, many will respond by increasing tax planning or diverting income into pensions and other structures.
- Pensioners and retirees.
- State pensions and DB pension payments are typically inflation-linked. With the personal allowance now frozen, many pensioners will start paying income tax on their retirement income for the first time or see larger portions taxed each year.
- This weakens the real value of pension increases and undermines retirement planning assumptions people made years earlier.
How This Impacts Long-Term Financial Planning
Threshold freezes change some underlying assumptions in UK financial planning:
- Disposable income growth no longer tracks inflation.
- Nominal pay rises can actually result in less real wealth due to higher taxes.
- Historical saving/super growth assumptions can now be too optimistic.
- Financial planning must be more active, not less.
This is especially the case for those saving for education, house purchase, or retirement over the next 5 years.
How the IRS Handles This Differently in the United States
Unlike the UK, the US tax system automatically adjusts many of its thresholds and allowances each year to reflect inflation.
This includes:
- The standard deduction
- The income tax bands
- Contribution limits and tax credits
This means that if your salary only increases due to inflation, your real after-tax income is the same. You won’t be automatically pushed into higher tax brackets as living costs increase. The idea is to be neutral on inflation: you only pay more tax if your real living standards grow, not just your inflation-indexed income.
How the IRS Inflation Process Works on US income tax brackets
Each year, the IRS adjusts many parameters (above) using official inflation data. This includes changes like:
- Increased standard deductions
- Higher marginal rate thresholds
- Adjusted retirement contribution limits
- Revised income levels for tax credits
The effect is that bracket creep is reduced, and taxpayers are less subject to stealth tax rises driven purely by inflation.
The table below integrates the US Single Filer data (including the 2025 “One Big Beautiful Bill” Act adjustments) with the UK Personal Allowance and Higher Rate (40%) Thresholds.
A key difference to note is the policy direction: while the US has adjusted brackets annually for inflation (with a legislative boost in 2025), the UK has maintained a “fiscal drag” policy, freezing thresholds since April 2021.
US vs. UK Tax Thresholds (2021–2026)
| Year* | US Std. Ded. ($) | % Inc. | US 10% Limit ($) | % Inc. | UK Personal Allowance (£) | % Inc. | UK 40% Threshold (£)** | % Inc. |
| 2021 | $12,550 | — | $9,950 | — | £12,570 | 0.6% | £50,270 | 0.5% |
| 2022 | $12,950 | 3.2% | $10,275 | 3.3% | £12,570 | 0.0% | £50,270 | 0.0% |
| 2023 | $13,850 | 6.9% | $11,000 | 7.1% | £12,570 | 0.0% | £50,270 | 0.0% |
| 2024 | $14,600 | 5.4% | $11,600 | 5.5% | £12,570 | 0.0% | £50,270 | 0.0% |
| 2025 | $15,750 | 7.9% | $11,925 | 2.8% | £12,570 | 0.0% | £50,270 | 0.0% |
| 2026 | $16,100 | 2.2% | $12,400 | 4.0% | £12,570 | 0.0% | £50,270 | 0.0% |
Key Notes
- *Tax Years:
- US: Calendar year (e.g., Jan 1 – Dec 31, 2025).
- UK: Runs from April 6 to April 5 (e.g., “2025” in the table refers to the 2025/26 tax year).
- UK “Fiscal Drag”: As shown in the table, the UK thresholds have remained frozen at £12,570 and £50,270. In the Autumn Budget 2025 (November 2025), the Chancellor confirmed these thresholds will remain frozen until at least 2031, continuing the policy of “fiscal drag” where inflation pushes more income into taxable bands.
- US “One Big Beautiful Bill” (OBBB): The significant US increases in 2025 (7.9%) reflect the OBBB Act, which boosted the standard deduction well above normal inflation adjustments.
- UK 40% Threshold: This figure (£50,270) represents the point where your income enters the 40% “Higher Rate” tax band. It is comprised of the Personal Allowance (£12,570) plus the Basic Rate band (£37,700).
Would you like to see a comparison of the effective tax rate for a specific salary (e.g., $50k vs £50k) to see how these different policies impact take-home pay?
UK vs US: Threshold Freeze vs Inflation Adjustment
A simple table comparison between the two systems.
| Features | UK (2025–2031) | US (Annual IRS Policy) |
|---|---|---|
| Personal allowance / standard deduction | £12,570 until 2031 | Increased annually with inflation |
| Income tax bands | Frozen at 2025 levels | Bands increase annually |
| Impact of inflation | Increases tax burden over time | System neutralises inflation |
| Risk of bracket creep | High | Lower |
| Effect on saving | Erodes disposable income | Preserves real income capacity |
| Long-term planning stability | Reduced | More predictable |
What This Means for Cross-Border and UK-Based Savers
For those with UK–US exposure (income, residence, retirement), this sets up an imbalance:
- UK tax drag increases steadily since thresholds don’t float
- US tax drag is softened since thresholds do float with inflation
- Over 5–10 years, this divergence materially affects real wealth compounding
For purely UK-based households, a freezing threshold means that you cannot rely on future pay rises alone to feel better off. You need to plan more deliberately: budget, tax-efficient investing, and realistic assumptions on real income growth.
Final Thoughts
Freezing thresholds to 2031 will surreptitiously push many more people into higher effective tax burdens without any headline rate changes. It will reduce real disposable income, compress your ability to save, and change the way households feel financially “progressing”.
By contrast, the US model of inflation-linking preserves the real shape of the system, making financial planning more predictable.